After drifting lower throughout the month, the average bid of LCD’s flow-name composite took a harsher fall in today’s reading, dropping 51 bps to 98.15% of par, versus the previous reading of 98.66 on Aug. 19.
Today’s drop is the steepest since December 2014, though note it is a week-over-week observation (the flow-names will return to the regular twice-weekly Tuesday/Thursday schedule after Labor Day).
While the flow-name composite had been steadily declining throughout August – there is not one single positive reading this month – declines accelerated in today’s reading. Equities have tumbled in very volatile trading in recent days as concerns about China’s economy have intensified.
Among the 15 names in the sample, 14 declined, and one advanced from the prior reading. Posting by far the steepest loss was the B-/B3 Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which is bid 3.75 points lower, at 84.25. Though there’s no news specific to the credit this week, higher-beta loans and those in out-of-favor sectors have well underperformed the broader market during this recent patch of volatility. By contrast, no other loan moved more than half a point, and excluding Avaya, the average bid would be down 28 bps.
Overall, lower-rated loans under performed: the nine loans in the sample rated B+ or higher, on average, declined 23 bps, to 99.31; the six loans rated B or lower, on average, fell 91 bps, to 96.42.
With a 0.52% drop, loans have held up well as compared with other asset classes in recent sessions. The average bid of the flow-name bond composite fell 94 bps, or 0.96%, over the week, to 96.78% of par, while even with today’s rebound, as of about 2:30 p.m. EDT, the S&P 500 had tumbled nearly 8.6% from the Aug. 19 close of 2,079.61.
Nevertheless, a 51 bps drop is nevertheless a significant move for the typically more stable loan asset class, and pushes the spread to maturity implied by the average bid out to L+430.9, which is 12.6 bps wider than a week ago, 34.7 points wider than the end of July and at its widest level since the end of December. The average bid, meanwhile, is at its lowest level since Jan. 6 (Note there have been some changes to the sample this year, so these are not apples-to-apples comparisons).
Overall, LCD’s flow-name bid declined a total of 1.51 points (1.51%) over the course of the month, down from 99.65 in the final July reading. High-yield and equities suffered a worse drubbing – the average flow-name bond composite slid 2.77 points (2.78%) during the month, while as of just after 2:30 p.m. EDT, the S&P 500 was on track to well underperform both loans and high-yield, off over 9.6% from the July 31 close of 2,103.84.
Given the wild swings in equities in recent days, arrangers and issuers will wait to see what the next 1.5 weeks bring, but the data above indicate that clearing yields are bound to widen when the primary market gets back to business after Labor Day. Market participants are also keeping a close eye on how the recent volatility – and the ensuing expectations that a September rate hike is no longer in the cards – will impact loan funds, which have seen outflows accelerate in recent days. LCD data project, per the Lipper sample of weekly reporters, for the five business days ended Aug. 25, outflows totaled $1.01 billion. As for CLOs, the recent weakness in the secondary creates a buying opportunity for managers, but liabilities could widen as well.
With the average loan bid sinking 51 bps, the average spread to maturity jumped 13 bps, to L+431.
By ratings, here’s how bids and the discounted spreads stand:
- 99.31/L+375 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+371.
- 96.42/L+535 for the six loans rated B or lower by one of the agencies; STM in this category is L+506.
Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds plunged 94 bps, to 96.78% of par, yielding 7.65%, from 97.72 on Aug 19. The gap between the bond yield and discounted loan yield to maturity stands at 339 bps. – Staff reports
- August: The average flow-name loan decreased 150 bps from the final July reading of 99.65.
- Year to date: The average flow-name loan increased 123 bps from the final 2014 reading of 96.92.
- Bids slip: The average bid of the 15 flow names tumbled 51 bps, to 98.15% of par.
- Bid/ask spread wider: The average bid/ask spread widened one basis point, to 38 bps.
- Spreads gain: The average spread to maturity – based on axe levels and stated amortization schedules – climbed 13 bps, to L+431.